Financial Innovation

In a recent Business Week article ("Get Credit Flowing, Heal Housing", November 17), the CEO of Ernst & Young is quoted as saying, "It would be a mistake to regulate so strongly as to stifle innovation." It's easy to reflexively agree with this statement if you don't think about it too much. But let's think about it for a minute.

Recent financial innovations have included junk bonds, derivatives, no-doc loans, interest-only loans, mortgage-backed securities, and credit default swaps. Recent prominent financial innovators have included Michael Milken, Enron, and Long Term Capital Management. Financial innovation seems dedicated to finding new ways to privatize profits and socialize losses, and innovations spread and generate profits until they cause a crisis, require a government bailout, and become regulated. Perhaps the field of Finance is mature enough now that innovation is more likely to cause harm than good.